A Good Year for REITs -- So Far; the Tech
Buzz

R eal-estate investment trusts confirmed their comeback in the year's first half. Spurred by a shift of cash from technology stocks in the spring's "tech wreck," the widely followed Morgan Stanley REIT Index showed a total return of 13.3% through the first half. And despite the runup in share prices, the average company in the index still boasted a dividend yield just north of 7%. Large-cap REITs -- as measured by Cohen & Steers Realty Majors, an index made up of the industry's 30 largest companies -- fared even better, posting a 14.8% total return for the first half.

REITs would have done even better had it not been for a frenetic wave of selling on June 30. Carl Tash, founder and principal with the California-based hedge fund Cliffwood Partners, reports that by his tally, 9.8 million shares of companies' stocks in the Morgan Stanley REIT Index traded in the session's last 12 minutes, compared with an average of 10-12 million shares a day since the REIT rally began. Tash, whose fund specializes in property stocks, and others attribute the flurry partly to a pair of sell programs targeting more than 70 stocks timed to exploit end-of-quarter window dressing by REIT funds. This time selling pressure overwhelmed the buyers, and the sellers got burned. The shares rebounded strongly in the July 4 shortened week, and several brokerage-firm analysts have raised their target rates of return this year to more than 20%.

Not everyone is so bullish. For one thing, the course of REIT share prices depends in part on what happens to tech stocks and other sectors. "There's no way to know how much money was parked in REITs by portfolio managers who sought shelter during the tech wreck," says Tash. If tech stocks rebound, or another sector emerges as the hands-down leader, REITs could suffer.

The Fed and possible further rate hikes also pose a threat. REITs' exposure to floating-rate debt, as well as the need to refinance borrowings in the normal course of business, could cut into earnings growth. For instance, a number of brokerage-firm analysts recently slashed their earnings estimates for
General Growth Properties
, a shopping-mall REIT, for this year and 2001 because of the impact of rising rates.

Another wild card: The market might have to absorb a flood of fresh shares. Several REIT executives report recent calls from investment bankers about raising cash through the sale of new stock to take advantage of lofty share prices. Though a number of blue-chip REITs are already on record as saying they have no intention of returning to the equity market this year, the combination of rising stocks and strong real-estate fundamentals may be too tempting for some REITs to resist.

T hose who track the flow of money into mutual funds dedicated to real-estate stocks, an indication of investor sentiment, have been noting apparently irreconcilable data from the same source. Last week, for example, they observed that two brokerage firms reported what appeared to be conflicting figures; indeed, one number was more than double the other. Both firms cited AMG Data Services in Arcata, California, as their source.

An AMG spokesman explains that the firm reports its data several ways. One set of data includes reinvested dividends and capital gains as new money flowing into the funds. But because most investors don't make a conscious decision to reinvest dividends and capital gains -- it's a box they check when they open their accounts -- many AMG subscribers prefer to focus only on fresh dollars coming into funds as the result of "active" decisions -- investors writing checks. Another source of confusion: Some fund companies report flows to AMG monthly rather than weekly -- a roster that includes fund giants Fidelity and Vanguard.

If, as at least one brokerage firm reported last week, $115.9 million had flowed into real-estate funds for the week ended July 5, it would have been a clear positive vote by individual investors on the outlook for REITs. That snapshot changes, however, if the focus is on how much active-decision money actually flowed into the funds during the period: just over $19 million. Since both numbers can be deemed correct, the AMG spokesman suggests that the "best" way to follow investor sentiment may be to watch the four-week moving average, excluding reinvested dividends and capital gains, of the funds flow. According to AMG, that number for the week ended July 5 was approximately $29 million.

But through July 5 -- excluding passive reinvestment -- fund flows were negative to the tune of $29.1 million, according to AMG. Current positive flows have yet to offset heavy early-year outflows.

T welve months ago, no one mentioned real estate and technology in the same sentence, quips Sam Zell, the Chicago financier who counts among his holdings a controlling stake in several real-estate companies. "All of a sudden," he says, "that's all anybody is talking about."

Zell stresses that real estate and technology are by no means an odd couple. And he says it makes sense for property companies to embrace technology through consortiums such as the recently formed Project Constellation, which among other things may provide seed capital to real-estate-related startup tech firms and which count Zell-controlled
Equity Office Properties
and
Equity Residential Properties
as members. But the industry is currently all abuzz about "technology initiatives," a term that embraces concepts as wide-ranging as hard-wiring buildings for high-speed Internet access and use of the Internet to assist tenants negotiating leases.

"Over time, technology initiatives will absolutely be material to companies such as Equity Office and Equity Residential," Zell believes, noting that until recently the real-estate industry didn't talk about margins. "Since Equity Office went public, its margin has gone from 59% to 66%. If we can use technology to add additional efficiencies to our business there's no reason to believe we might not be able to add another, say, 10%." But Zell is skeptical about the ultimate value technology will add to property companies. Ray Weeks, vice chairman of Indianapolis-based Duke-Weeks Realty, is heading up that company's technology initiative and is a member of the Office Technology Consortium, a group of public and private real-estate companies that are working on forging alliances that would streamline everything from back-office operations to leasing. Weeks shares Zell's skepticism. "It's important to be realistic about what these initiatives are likely to accomplish and over what time frame," he says. Though he's a bit more bullish than Zell on what the technology initiatives could add to companies' bottom lines, he stresses that the payoff is likely to take a number of years. "Over four to five years, the companies may be able to add between 10% and 20%."

BARRY VINOCUR is the editor of Realty Stock Review and Property magazine, published in Ocean, New Jersey. E-mail: bvinocur@rainmaker-media.com

A Good Year for REITs -- So Far; the Tech
Buzz

R eal-estate investment trusts confirmed their comeback in the year's first half.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.